Or should I say “God Save the King”, which is now the official name of the English national anthem since the death of the Queen. She must be turning over in her grave at the sight of inflation which is rising at the speed of a galloping horse. So much so that the Bank of England has taken the financial community by surprise.
We can’t stress this enough. Central banks are like trains: one can always hide another, if not several. And in this game, investors were particularly spoiled last week. They saw the British, Swiss, Norwegian and Turkish central banks come and go. Not to mention a special warm-up by star-spangled chef Jerome Powell. The big surprise came from across the Channel. While CPI Core inflation rose to 7.1% y/y vs. an estimated 6.8% y/y, the BOE tightened its monetary policy by a further 50 basis points to 5%, whereas the consensus was for an increase of only 25 basis points. You have to go back 15 years to find such interest rate levels.
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(Source: Bloomberg)
However, there’s no point in rejoicing too quickly at the misfortune of others (caused in part by the Brexit?) because in continental Europe and the USA, the fight against inflation is no more won than it is in the UK. According to CME’s Fedwatch tool, the odds of a further 25 basis points of monetary tightening in July now exceed 75%. So much so that bond yields are now equivalent to those of the stock market (based on CAPE Yield or Cyclical-Adjusted Price Earning Yield). In other words, US equities no longer remunerate the risk associated with their asset class, another way of illustrating the saying “A bird in the hand is worth two in the bush”.
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(Source: Bloomberg)
